HR&IR Update | Federal Court decides independent contractors are really employees and are entitled to annual leave and long service leave

21 November 2011

What happened?

Five insurance agents engaged as independent contractors (Agents) claimed they were entitled to annual leave and long service leave following the termination of their engagement.

The Agents were paid commission, had limited rights to employ others, were not prevented from performing other work and were described in their agreements as independent contractors.

On the other hand, the insurer gave the Agents sales leads and training and encouraged them to behave as though they were part of the insurer's organisation.

In a decision handed down in late October 2011, Justice Perram of the Federal Court decided the Agents were in fact employees – and were entitled to annual leave and long service leave.

A key reason for the decision was the finding that the Agents were not conducting their own business but were clearly part of the insurer's business.

Justice Perram also decided the insurer couldn't rely on an indemnity given by the Agents to cover the leave costs as this was against public policy.

What does it mean?

Even where a person is engaged as an independent contractor, and in some respects works as such, they may be an employee at law.

This can have very serious implications, for example:

the person will be entitled to employment benefits under legislation and any applicable industrial instrument (including annual leave, long service leave, superannuation and possibly overtime and other penalties or loadings)

the person may have unfair dismissal rights

the company will have likely breached its income tax withholding obligations and possibly its payroll tax obligations

the company may have breached its workers' compensation insurance obligations by not fully reporting its wages bill

the company would be vicariously liable for the employee's negligent acts.

Even if a person is a contractor and not an employee, he or she may still be entitled to superannuation and workers compensation (and the company may be liable for payroll tax) because the relevant legislation specifically extends to some contractors.

Why is it important?

This case is illustrative of a general trend.

The Fair Work Ombudsman's preliminary report on its Sham Contracting Operational Intervention, released on 11 November 2011, found significant instances of employee misclassification.

The ATO has announced that targeting sham contracting arrangements will be a key focus for 2012.

The Fair Work Ombudsman has recently conducted several successful prosecutions for breach of the sham contracting provisions in the Fair Work Act 2009 – including against an HR Manager.

In another recent case, the Federal Court decided that nearly 2000 interpreters and translators engaged as contractors were in fact employees.

What should I do?

You should carefully review your independent contractor arrangements – particularly as the superannuation and workers compensation and payroll tax provisions could apply regardless.Want more information?